“Recession or No Recession” - Nick Stenger’s Weekly Insights - November 30th, 2023
The doom and gloomers got 2023 completely wrong. Instead of plummeting, the S&P 500 Index has so far produced strong, double-digit returns, primarily led by the strongest and best companies. As we predicted at the end of last year, U.S. large-caps have outperformed almost every other asset class including small and mid-caps, international (excluding Japan), and bonds. At the same time, money markets have reached an all time high of over $5.7 trillion. 5% risk free sounded good in January, but in comparison to stocks, terrible. Part of the reason stocks have outperformed expectations this year is because we were coming off low prices at the end of 2022. Many companies still have not recovered to their December 2021 highs.
The recessionary narrative has continued all of 2023, and now many economists say 2024 will be the year where everything falls apart. We have a few issues with this analysis, but primarily, markets are a forward-looking indicator of what’s to come. If investors think something bad will happen 6 months from now, stocks will go down today. By the time the bad news happens (if it happens at all), stocks are on their way back up. The same is true for good news. Attempting to time the market around doom and gloom headlines is almost always a bad idea. And in many cases, stocks can go up in the midst of a recession.
Recessions are officially declared in reverse by the National Bureau of Economic Research (NBER). According to their own definition, a recession is two consecutive quarters of negative GDP growth. On a nominal basis, we avoided recession in 2022. But on a real (inflation adjusted) basis, we entered a recession in the early and middle part of last year. While mild, we did see two consecutive declining quarters of real GDP in Q1 and Q2. In some ways, we think the media covered up the recession by not reporting the real data, rather focusing only on nominal numbers and the NBER did not officially call 2022 a recession year. While NBER ignored the data, markets did not. The S&P 500 sold off nearly 20% last year because real GDP contracted. At the end of the day, markets are rarely wrong…we had a mini-recession last year.
Because many economists ignored this reality in 2022, they’re now looking into the future for the next recession. Problem is, recessions don’t happen that often. Most recessions happen at the tail end of an 8 to 10-year expansionary cycle. While it’s not science, we may not see another major recession until 2030 due to the economic contraction last year. Simply stated, the economy could keep chugging along without a major meltdown for years to come. Further, it’s hard to imagine another recession without a major labor market correction. In our estimation, unemployment would need to rise past the 5% level before a recession is in the cards. The current unemployment rate is 3.9%, up slightly from pre-COVID lows of 3.5%. Even with 1 million net layoffs in 2024, unemployment would still only be 4.5%, not a cause for panic.
Recessions don’t happen out of thin air and each future recession is caused by a completely different set of reasons than previous events. One constant through each cycle though, is Federal Reserve rate hikes. Many point to Powell’s aggressive tightening as a cause for concern. While there will no doubt be a slowdown at some point, most of the economy has been largely unaffected by rising rates. For starters, over 61% of mortgages have a rate below 4%. Further, 40% of U.S. homeowners own their properties outright, one of the highest levels ever. Large companies have more cash on their balance sheets than ever before and aren’t being forced to finance projects at higher rates. At the same time, lower income families and small companies are undoubtedly struggling, and some will go bankrupt, but its not enough a share of the broad economy to take us out.
We’ll have a recession at some point, but it may be relatively mild and not be the doomsday scenario pessimistic pundits are expecting. There’s never been more people bearish or more cash sitting in money market funds than there is right now, a reason stocks could continue surprising to the upside for years to come.
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About the Author:
Nick Stenger
Chief Executive Officer
Financial Advisor
Phone: (630) 912-8295
Email: nick.stenger@stengerfamilyoffice.com
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